Sunday, August 17, 2008

In 2008 the average pay raise in the USA was 3.7%. That was 1.8% over the projected rate of inflation. So the effective pay rate increase was (3.7-1.8) = 1.9%. Unfortunately, those projections for inflation were low.

In reality, the actual inflation rate, year to date, is up 5.6% from its level a year ago. And that is the government’s calculation of the inflation number -which always seems lower than the effective rate. Just out of curiosity I checked my budget expenses in MS Money and calculated my own inflationary rate for gas and food. For the year to date, I have spent a whopping 34% more on gas and another 30% more on groceries compared to last years expenses.

What can we expect for pay raises in 2009?

According to this Wall Street Journal article merit increases for next year are expected to average around 3.7%. Given these numbers, it seems there is no correlation between the average pay increase and inflation. The old cost of living adjustment, COLA, has long given way to performance only raises, which has conveniently ended any ties to inflation. A raise is only a raise when it exceeds the rate of inflation. Anything less and you are losing ground.

2 comments:

Question for ya given a 3% inflation. Raises apply to gross income. If you get a 3% raise and you pay a 40% marginal tax rate (Canadian here, we pay lots), does this not actually correlate to a 1.8% increase in take home pay? And if so, since the costs of goods could give a rats ass about the difference between gross and net income, you are effectively 1.2% poorer.

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